Welcome to the first edition of RED Alert of 2024
Also featuring in this month's update:
Leasehold and Freehold Reform Bill
Summary
In November 2023 the Government introduced the long-awaited Leasehold and Freehold Reform Bill (the Bill) to Parliament, signalling a significant change to the system of residential property ownership in the UK. The Bill, which has now passed through its first two readings in the House of Commons with overwhelming support from MPs, seeks to amend the Leasehold Reform Act 1967 (the 1967 Act) and the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act), to extend tenant rights.
The proposed reforms
The Bill introduces wide ranging reforms to both the 1967 and 1993 Act which the Government claims will promote "fairness and transparency" for leaseholders. These reforms predominantly relate to the following 4 key areas:
- lease extension and enfranchisement
- right to manage
- service charges and ground rent
- estate management.
Lease extension and enfranchisement
Perhaps the most substantial legislative changes made under the Bill relate to the process for lease extension and enfranchisement which are currently regulated by the 1993 Act and 1967 Act respectively.
The Bill introduces the following key changes in this area:
- Under the current provisions of the 1993 Act, the maximum term which can be granted in a lease extension claim is 50 years for houses and 99 years for flats. However, the Bill increases this to 990 years for both.
- The Bill introduces a new methodology for valuing the premium payable to the freeholder in exchange for the extension. This new method will no longer take account of marriage value and adjusts how ground rents are to be taken into account in the valuation. Whilst the specifics of this new valuation method will need to be reviewed by experts in the field, it is clear that, once the Bill comes into force, it will result in reduced premiums for tenants to pay in order to extend their leases.
- The Bill also envisages that the Government will have the power to prescribe rates to be used in enfranchisement premiums, again with the goal of reducing costs for tenants (who can elect to use the valuation under the 1967 Act if it produces a more favourable result).
- Landlords will be prevented from opposing claims under the 1993 Act and the 1967 Act on redevelopment grounds, on the basis that they will be a resident landlord or that the land is required for public purposes.
The Bill also makes some significant procedural changes which are designed to facilitate claims for tenants. In particular:
- The current requirement that a tenant must have owned the lease of their property for at least 2 years before they are able to extend or enfranchise will be abolished.
- Under existing legislation, tenants whose extension or collective enfranchisement claim has been withdrawn or deemed withdrawn must re-start the process again by serving a further notice on their landlord, which they cannot do for 12 months following the date of withdrawal. The Bill, if passed in its current form, will remove this requirement for further notice and a fresh claim can be issued immediately.
- Tenants who live in mixed use buildings where 50% or less is for commercial use will now be permitted to collectively enfranchise whereas under existing legislation this threshold is set at 25%.
- Tenants will no longer be required to pay the landlord's costs of the extension or enfranchisement claim by default except in limited circumstances.
- Jurisdiction to decide certain matters under the 1967 Act and the 1993 Act will be transferred from the Court to the Tribunal.
RTM companies
The new legislation proposes a number of similar reforms with respect to the formation of Right to Manage companies. These include increasing the limit on the number of commercial leaseholders permitted before an RTM company can be formed in respect of mixed use developments from 25% to 50% and relaxing the requirement for an RTM company to pay the landlord's fees incurred in connection with the right to manage process except where the Court or Tribunal has the power to award costs in proceedings.
Service charge and ground rent
The Bill's reforms also extend to both service charge and ground rent, providing tenants with new statutory rights to:
- Vary the lease to reduce the ground rent to a peppercorn (provided that they have a qualifying lease)
- Require the landlord to provide specific information in relation to both service charges and insurance premiums. It is anticipated that the type of information which will fall within this provision will be clarified in secondary legislation, but it will undoubtedly result in more transparency of costs than the existing provisions which only entitle tenants to inspect the landlord's invoices and receipts.
The way in which landlords can demand service charges is also set to change, with the Bill introducing a new requirement for service charge demands and a written statement of account to be in a standardised format, otherwise funds will not be due. This, in addition to the extension of the statutory regulation of service charges under the Landlord and Tenant Act 1985 to both fixed and variable service charges, is intended to provide tenants with a greater degree of protection against unreasonable charges.
The Bill will also ban insurance commissions for freeholders and managing agents with the effect that the only charge which can be passed onto leaseholders is the insurance premium itself. Administration and legal charges are also targeted as the Bill introduces a new duty on landlords to publish an administration charge schedule in a bid to improve transparency and limits the rights of landlords to claim litigation costs from tenants.
Estate management
Broadly speaking, the final area of reform in the Bill relates to estate management charges. Once the Bill comes into force, landlords will face limits on the extent to which they can recover these charges and any unreasonable charges will not be recoverable. The Bill also contains a new consultation requirement which will apply where the cost of the works exceeds an "appropriate amount" set by secondary legislation.
In recognition of the fact that some homeowners who are required to pay estate management charges will own the freehold interest in their homes, these changes will apply to leaseholders and freeholders alike.
Our Comments
There can be no doubt that this new radical legislation will shake up the existing leasehold system and create a more favourable environment for long leaseholder tenants. Despite the numerous reforms outlined above, one change was notably absent – in its current form, the Bill does not include any provisions relating to the banning of leasehold new build houses which was much anticipated. Statements made by the Government following the introduction of the Bill appear to indicate, however, that we should still expect this reform to be introduced into the Bill by way of amendment as it passes through Parliament.
Whilst many leaseholders will welcome the changes, Landlords with large residential portfolios will be particularly mindful of the proposed reforms and the possible impact on their revenue streams. If you are a landlord or tenant and require advice on how the Bill will impact your circumstances, do not hesitate to get in touch with a member of our team.
